The ETF Portfolio Strategist: 13 Aug 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Is it a bear market rally or the start of a new bull market? Such questions can only be answered with confidence after the fact. In real time there’s always a fair degree of risk in trying to decipher such puzzles. Whatever the final answer, it’s clear that markets are rallying in the here and now. How long and how far is open for debate, but several slices of global markets look set to push higher in the near term.
Although we’ve yet to see a +5 for the Signal score in our Global Beta 16 opportunity set, there are several +4 readings, just one notch below the strongest upside momentum print. (For details on the methodology, see this summary).
Notably, broadly defined and small-cap US equities are posting +4 readings, which isn’t surprising when we look at the recent price action. The iShares Core S&P Small-Cap ETF (IJR) closed up for a fourth straight week, reaching the highest level since April.
The US junk bond sector — another member of the +4 Score club — is also running hot again. SPDR Barclays High Yield (JNK) posted its sixth straight weekly gain as Friday’s close.
In the international space, Latin America stocks (ILF) continue to catch a bid too.
The weakest corner for our Signal scores: US Treasuries (IEF), which slumped back to a modestly bearish -1. Mr. Market can’t make up his mind yet on whether bonds are a good value or still subject to high risk. Once again, the key question for this space is deciding which macro risk factor will dominate in the weeks and months ahead. If slow growth/recession will dominate, bonds look set to rally further. By contrast, if inflation/rate hikes are destined to run the show, fixed income will suffer.
The challenge is that there are good arguments on both sides. What is clear, or at least clearer for me, is that the Federal Reserve is committed to taming inflation, in part to preserve credibility. There are hints that inflation is peaking, but that’s only part of the battle. There’s also the more challenging issue of pushing inflation substantially lower. On the latter front, the central bank still has a lot of work ahead. Not surprisingly, another rate hike — 50 or 75 basis points — at next month’s FOMC meeting is widely expected. Will that suffice? If it is, risk-on’s prospects look encouraging. But assuming the next round of inflation stats for August, which will be published ahead of the Sep. 21 FOMC meeting, looks too ambitious at the moment.
Looking at markets through a portfolio lens also shows price firming recently (see this sumary for the strategy benchmark designs). There’s probably more upside ahead, but deciding how far this runs is also hanging on results in upcoming macro reports. Meantime, put as down as cautiously bullish for the near term.
That leaves us with a question to ponder in the weeks ahead: When the crowd returns after the Labor Day holiday early next month, are we looking at the possibility of sobering up after a summer party? ■